The Death Of Secured Loans?

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 09 July 2008  |  Comments 7 comments

The UK's largest provider of secured personal loans is to stop lending. Will the credit crunch kill off this market?

Yesterday, Barclays announced that it is closing down FIRSTPLUS Financial Group (`FirstPlus'), a secured-loan business acquired by the bank when it bought Woolwich BS in 2000.

Although you may not be familiar with FirstPlus, you've probably seen its television advertisements starring Countdown presenter Carol Vorderman. I've always been a fierce critic of secured loans and second mortgages. Thus, I was troubled that the mathematically minded Carol agreed to be the public face of FirstPlus, and I was pleased when Carol finally stepped down last month after a decade as FirstPlus's figurehead.

As you're probably aware, the ongoing credit crunch has caused a dramatic reduction in mortgage and other secured lending. Inter-bank lending has all but vanished, and tighter lending criteria and higher interest rates have pushed FirstPlus's business model to the limit. Thus, with house prices expected to fall much further, the group has decided to stop lending.

Although FirstPlus will continue to service its existing 128,000 secured loans, it will stop lending to new customers with effect from 9 August. Although this will secure 130 jobs, 300 employees are at risk, which will be a blow for the city of Cardiff, the home of FirstPlus.

Of course, I feel sorry for employees that will lose their jobs if they cannot find positions elsewhere in Barclays. However, I'm not unhappy to see the back of FirstPlus, which positively encouraged borrowers to consolidate (roll up) existing unsecured debts in to a secured loan.  This dangerous strategy can backfire, causing borrowers to lose the roof over their heads.

FirstPlus isn't the first lender to exit the market for secured loans, but it is the largest. It specialises in lending money to borrowers with less-than-perfect credit records. These customers usually have problems borrowing from mainstream lenders, so they are forced to pay the higher interest rates charged by FirstPlus and its rivals.

Problems with secured lending are having an impact across the financial services industry. Yesterday, Fool rival MoneySupermarket warned that FirstPlus's exit would lower its revenue by £7 million a year. Its shares promptly fell by almost a third (32%) to an all-time low of 59.5p. (At this point, I should declare that Fool.co.uk also operates a secured-loans service.)

Many times during the last housing crash, I witnessed homeowners losing their homes when they couldn't afford to keep up their monthly repayments. In every single case, repossession was not caused by homebuyer mortgages, but by secured loans or second mortgages. 

Thus I'm delighted that the secured loan market is now contracting fast. In fact, I'll be delighted when those awful adverts from Ocean Finance and the like finally stop appearing on television!

More: Find marvellous mortgages today | Last Of The Low-Rate Loans | Goodbye, Carol Vorderman and Firstplus! (from our discussion boards)

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Comments (7)

  • BobSnugglepuss
    Love rating 0
    BobSnugglepuss said

    Well commented Cliff !

    You are glad to see the back of the secured loan industry are you?

    Loads of people made unemployed... Loads of people unable to borrow the amount they need, thus leading to financial difficulies for them...

    How can you be so hypocritical? Fool advertises for secured loans and if I am not mistaken, when a customer is referred from Fool to LoanMakers, Fool receive a commission!?!

    Your 'unbiased' review of the situation is flawed. You mention that every single reposession is due to secured loans. NO THEY ARE NOT! If you are going to make generalisations without having facts to back them up, don't bother generalising in the first place.

    Some secured loans are bad obviously, but some are not. First Plus were very strict on their criteria (although stupidly offering 125% equity deals possibly wasn't there smartest move).

    Another question for you, is the blurb you have been spouting your personal view or that of Motley Fool? I'm sure your last comment "...awful adverts from Ocean Finance.." could be considered libelous. As well as a finance 'expert' are you also an advertising 'expert'?

    Report on 15 July 2008  |  Love thisLove  0 loves
  • flyboy80
    Love rating 0
    flyboy80 said

    I might be mistaken for thinking that the comments on this article were to help or inform other fools about products or issues that affect a "real" life situation.
    JournoJoe
    "That's right - unsecured credit providers can apply to the courts if you are a homeowner to make you sell your property and pay them what they are owed."
    This is scare-mongering, just like the credit-crunchers and the Doomsday Book folk, this is incorrect. A lender can only and very rarely applies through the courts for you to sell you home, after you have been issued a CCJ and have repeatedly failed to pay. To have a second charge on your house/home can only be sought via a Tomlin Order, of which you must have agreed to in the first place. Tomlin orders unfortunately are becoming common place because lenders
    now wish protect and correct their mistakes, and make their victims change an unsecured debt into secured by suggesting that if the borrower agrees to allowing a "second" charge on their home, they will not pursue them, or take them to court.

    Why would you secure your home against an unsecured debt? - unless under duress!

    Any company that has also made a profit, indeed hefty profits from advising people to risk the roofs over their heads, and is now struggling to survive, knew the risks that they as a company were taking. After all to advertise prime time TV on multi channels is not cheap.
    Someone, somewhere is laughing his/her socks of right now !!

    Report on 15 July 2008  |  Love thisLove  0 loves

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